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Fannie Freddie Rally Returns With a Vengeance

NEW YORK (
TheStreet) --
Fannie Mae(FNMA) and
Freddie Mac(FMCC) shares have more than doubled over the past 10 trading days on heavy volumes, adding to big gains posted in March after the shares had been dormant for several weeks.

Professional investors
who have long touted the junior preferred shares of the Government Sponsored Enterprises (GSEs) have shaken their heads in disbelief at the common stock rally, though at least one big fund focusing on distressed investments is now rumored to be trading the common shares. The senior preferred shares of the GSEs and 80% of the common stock are owned by the U.S. Treasury, which put Fannie and Freddie into conservatorship in Sept. 2008.

Despite a broad market decline on Thursday, Freddie Mac common shares were up 17.37% to $1.98 at about 2:30 p.m. EST and are up about 650% year to date. Fannie Mae shares were up 14.21% to $2.09 and are up more than 700% year to date. That compares to roughly 200% gains for preferred issues.

Fannie and Freddie's combined market cap is now at about $17.5 billion vs. roughly $6.5 billion for the preferred shares, according to Michael Kao, head of Woodland Hills, Calif.-based hedge fund Akanthos Capital Management. If the preferred shares were fully valued, they would be worth more than $30 billion.

The most liquid preferred issues, such as the Fannie Mae "S" shares
(FNMAS) and the Freddie Mac "Z" shares
(FMCKJ) trade at roughly 20% of their issue price, meaning investors will make five times their money if Fannie and Freddie repay their debts to preferred holders. The preferred securities were also higher Thursday, though percentage gains were in the low- to mid-single digits.

"It's really bizarre," Kao says of the common stock rally. "I can see the technical reason why you would do it because it's highly liquid, it's been trading in huge volume and I guess you could make some quick money kind of day-trading the thing, but I don't see why you would want to own the common [given the current prices of] the preferred."